3 Ways Royal Mail PLC Will Continue To Lead Its Sector

How does Royal Mail PLC (LON: RMG) compare to its sector peers?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RoyalMail

Right now I’m comparing some of the most popular companies in the market with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at Royal Mail (LSE: RMG).

Valuation

As Royal Mail is fairly new to the market historic financial data for the company is not as forthcoming as I would like. In addition, as essentially a one-of-a-kind company, Royal Mail has few business peers.

However, Royal Mail sits in the industrial transportation sector of the market within which it has two potential peers, Stobart Group and UK Mail Group (LSE: UKM).

Arguably, Royal Mail’s closest equivalent as a business is the UK Mail Group.

So, let’s have a look at the valuations. Based on City estimates Royal Mail is trading at a forward P/E of 12.2. In comparison, UK Mail is trading at a forward P/E of 19.7 and Stobart Group is trading at a historic P/E of 15.4.

What’s more, the industrial transportation sector average is trading at a historic P/E of 19.7. All in all, this indicates that Royal Mail is cheap at current levels, despite recent gains. 

 Company’s performance

In addition, it would appear that Royal Mail’s current valuation is undervaluing the company’s growth, both historic and that predicted by the City.

In particular, during the past two years Royal Mail’s pre-tax profit has exploded 62%. Furthermore, based on current City estimates, the company’s pre-tax profit is expected to hit £683 million for 2015. That’s compounded growth of 242% over four years, which is impressive.

In comparison, UK Mail has been able to notch up pre-tax profit growth of 38% during the past two years and earnings per share are expected to expand around 30% for 2014.

This further supports my argument that maybe Royal Mail does deserve a higher valuation.

Dividends

At current prices Royal Mail supports a dividend yield of 2.4%. Additionally, City analysts currently predict that Royal Mail’s dividend payout will expand 60% during the next two years. 

Unfortunately, this is lower than that of UK Mail, which currently supports a dividend yield of 3.1%. Although this yield is higher than that of Royal Mail, UK Mail’s dividend payout is only expected to grow around 20% during the next two years.

Foolish summary

All in all, it would appear that Royal Mail is relatively undervalued in comparison to its closest rivals. So, overall, I feel that Royal Mail is a much stronger share than its peers. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Rupert does not own any share mentioned in this article. 

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »